Vendors

Microsoft faces competition for its Surface Pro 2 tablet, and it's from an expected source: One of its own hardware partners.

A week ago, Dell introduced the Venue 11 Pro, a tablet-slash-notebook slated to go on sale next month. The 10.8-in. tablet, which will run Windows 8.1 and is powered by an Intel Atom quad-core processor code-named "Bay Trail," will be priced starting at $499 -- less than half the price of the entry-level Surface Pro 2, the Microsoft-designed and -made tablet set to launch Oct. 22.

Like the Surface Pro 2, Dell's Venue 11 Pro can be partnered with an optional keyboard that doubles as a cover, a different keyboard that features a built-in battery for longer life away from an electrical socket, a stylus, and a docking station that sports multiple USB 3.0 ports and a display-out jack for transforming the tablet into the engine of a desktop system.

But the rival tablet didn't come out of left field: Microsoft, in fact, has been encouraging its OEM (original equipment manufacturers) partners to step up their design game, and has, at times, positioned its own Surface line as more of a benchmark, an aspirational target, than devices it plans to sell in volume.

Talk of that purpose for the Surface has been more muted this year, however, as Microsoft swivels its strategy from being a software seller to one that envisions itself as a "devices-and-services" company, with as much emphasis on the first half as the second. Microsoft wants to sell Surface tablets -- and any other hardware it ends up making, including smartphones next year -- and turn a profit. And not necessarily a small profit.

Is there tension between Microsoft and its partners, or one between the camps within Microsoft that on one hand want to keep OEMs selling devices while on the other hope to maximize its own hardware sales?

One analyst thought so.

"Microsoft is a threat to OEMs, particularly because it has a subsidized business model," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, referring to Microsoft's ability to eat the cost of the Windows license if it wanted. "Originally, Microsoft said they weren't going to directly target business, but they've actually engaged their enterprise sales force to sell the Surface Pro. And at the end, enterprise is what the OEMs care about."

Yet Moorhead qualified his commentary. "Strategically, I think they're only doing hardware because they have to," Moorhead said, echoing analysis that harks back more than a year to the launch of Surface, when analysts accepted the theme that OEMs were not up to the task of design and form innovation as the traditional PC waned. "They can point to the Dell product [the Venue 11 Pro] and say, 'We've raised the bar. And because the Venue includes a Windows license, we can feel good about that, too.'"

And bottom line, Microsoft would be happier to simply sell Windows licenses, as it's done for decades, without the hassle and expense of creating and marketing its own hardware, Moorhead said. "Even though Microsoft wants to be a device and services company, I think they feel a lot better about just selling the [Windows] license."

Ross Rubin, of Reticle Research, saw it differently. Rather than a zero-sum game -- sales by Microsoft dampen those of OEMs, and visa versa -- Rubin, formerly an analyst at the NPD Group, outlined a third scenario.

"What Surface can accomplish is providing a sort of permission to other OEMs that it's okay to experiment with some aspects of PC design. You see this from Apple, from an industry perspective," said Rubin, referring to copying of the MacBook Air form factor by Windows PC makers. "When Microsoft does it, it's a statement that it can work in the Windows ecosystem."

Dell made its own choices, but the marrying of detachable keyboard with a tablet, argued Rubin, was something OEMs would have been unlikely to do on their own if Microsoft had not blazed the trail.

Microsoft CEO Steve Ballmer said much the same yesterday during an on-stage Q&A at Gartner's IT conference. "Some innovations are probably easier to pioneer, both in the phone and tablet form factors, if we drive some hardware as well as some software innovation [ourselves]," he said, citing the inclusion of a stylus with the Surface Pro as an example.

"[Surface] is about the need to push forward," Ballmer added.

But the Venue knockoff of the Surface Pro wasn't Microsoft's only worry last week. Dell, long a stalwart OEM firmly in Windows' camp, also unveiled a pair of inexpensive Android tablets. Dell's 7-in. Venue 7 and its 8-in. Venue 8 will sell for $149 and $179, respectively. The tablets were Dell's first return to Android on tablets since December 2011, when it dumped the Streak 7.

Moorhead read the tea leaves, but didn't see a desertion by Dell in the offing.

"I think Dell would have rather sold a successful Microsoft product, but their hand was forced," said Moorhead. "When you look at the 7-in. tablet market, it's nearly impossible to hit that price point with an OS that takes up a third to half of the bill of materials," he continued, talking about the Windows license.

Rubin echoed Moorhead. "This shows where Dell is placing their bets. They're marrying the sweet spots of the market to what OS options they have," said Rubin. "A full-keyboard device is Windows, but an inexpensive tablet under $200, that's an Android market at this point."

Although rumors have claimed that Microsoft will eventually introduce a smaller-size Surface tablet, a so-called Surface Mini, perhaps an 8-in. device, speculation has recently centered on a 2014 debut. In the absence of Microsoft pioneering the smaller form factor, some Windows OEMs have tried their hands, but with limited success.

That has handicapped Windows' uptake in tablets: The majority of tablets sold this year will be 7-in. and 8-in. models.

Moorhead wondered whether Dell's move into Android at the low end might spark Microsoft to be more flexible in its Windows license prices to OEMs eager to cash in on the small-tablet market. "Yes, I do expect that they're getting more competitive with license pricing," Moorhead said of Microsoft, pointing to reports that it has tried to entice HTC into producing more Windows Phone-powered smartphones by offering drastic cuts on OS fees.

Dell's reentry into Android also makes it more likely that the Round Rock, Texas company will stick its toe in the Chrome OS waters, said Moorhead and Rubin. Chrome OS, Google's browser-based operating system, powers the line of notebooks generically known as Chromebooks, such as the $279 device Hewlett-Packard introduced this week.

"Dell supporting Chromebooks is a lot closer now that they've moved to Android," said Moorhead. "They're trying to maximize the sales opportunities."

At the moment, that would be a bigger blow to Microsoft than Dell's tentative step with low-priced Android tablets, as Chromebooks -- although only about 3% of sales in the U.S. during the back-to-school season -- compete directly with the bargain basement non-touch Windows laptops.

But Dell might be hesitant to make such a move: Although there's no publicly-known details of a possible quid pro quo between Microsoft and Dell for the former's $2 billion loan to the latter, part of the funding used by Michael Dell and his backers to privatize the company last month, there were strings attached to the deal.

As long ago as February, analysts speculated that there might be a "gentlemen's agreement" between the companies that committed Dell to pushing Windows as the OS for its hardware, or prevented it from straying to alternate operating systems, like Chrome OS.

"At Dell, the pressure is on for Chromebooks," Moorhead maintained today. "HP did a major launch at a very competitive price [with the Chromebook 11]. That puts the pressure on Windows in the U.S. and Western Europe."

Slideshows

Selling beyond the CIO – How partners can influence the new breed of tech buyers

This ARN Roundtable, in association with Oracle, highlighted the emergence of a new breed of technology buyer, assessing how partners can engage outside of IT, and the skills required to sell across new business units.

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